UPS' announced rate hikes understate real impact to customers, parcel consultants contend

The rate increases announced late Friday by UPS Inc. on its 2013 noncontract business mask the actual extent of the cost that retail shippers will have to bear next year, according to two parcel consultants.

The Atlanta-based transportation and logistics giant announced a 5.9-percent increase on noncontract rates for its core ground parcel business, minus a 1-percentage point reduction in applicable ground fuel surcharges. Additionally, tariff rates on the company's air letter, air package, and all U.S.-origin international services will rise 6.5 percent, minus a 2-percent reduction in fuel surcharges. Rates for the company's airfreight services moving within and between the United States, Canada, and Puerto Rico will rise 4.9 percent, as will rates on three-day deliveries within and between the same points.

The new rates, which are essentially a median of the UPS consignment universe, take effect on Dec. 31.

However, all UPS rates will not be created equal, according to an analysis by Shipware, LLC, a San Diego-based consultant. For shipments weighing up to 30 pounds—a key weight class for parcels—tariff rates will rise even more, from a 6.97-percent increase for ground to 8.80 percent for three-day air services, according to Shipware. Rates for next-day air deliveries within that weight class will rise 7.7 percent, Shipware said. All of the increases calculated by Shipware are not adjusted for the impact of fuel surcharges.

The minimum charge for all ground deliveries will rise 35 cents a package to $5.84, an increase of 6.4 percent, Shipware said. It also noted a near double-digit year-over-year increase in a multitude of UPS' "accessorial" charges, fees tacked on by the carrier on top of the base rate for such charges as "address corrections" and "on-call pickups."

Tyre Sperling, a UPS spokesman, confirmed the consultant's estimates.

NO RELIEF FROM FEDEX
Shipware added that the rate increases imposed by UPS rival FedEx Corp. for its air and international services will also exceed the disclosed 5.9 percent "average" rate hike announced by the company. However, the FedEx hikes in the under-30 pound weight class don't appear to be as hefty as those levied by UPS, according to the Shipware data. For example, rate increases on FedEx's two next-day delivery products, Priority Overnight and Standard Overnight, will increase by 5.82 percent and 6.63 percent, respectively, Shipware said.

The tariff increases announced by FedEx, which take effect Jan. 6., will be adjusted for a 2-percent reduction in fuel surcharges. The Memphis-based company has not announced rate changes for its ground parcel or home delivery service. Nor has it announced changes for the operation it conducts jointly with the U.S. Postal Service (USPS).

Gerard Hempstead, who runs an Orlando, Fla.-based parcel consulting company, calculated that UPS' minimum charge will rise by 5.38 percent and that even shippers with discounted pricing programs will have to bear all of that increase. UPS customers "need to plan and budget for at least [a 5.38-percent increase] and not be lulled" by the pronouncements of lower rates made in the company's press release, Hempstead said.

According to Hempstead, the parcel giants have been engaged for years in some nifty sleight-of-hand for calculating their respective fuel surcharges. Hempstead said the companies "bake" about 1 to 2 percent of their fuel surcharges into their base rates, depending on the type of service. As a result, despite the purported surcharge reductions announced by the carriers, shippers are actually paying more for fuel because the charges are being levied from base rates that escalate every year, Hempstead said.

EFFECT OF "DIM WEIGHT"
Another cost challenge confronting shippers is the evolving impact of a move in late 2010 by FedEx and UPS to adopt a new dimensional-weight pricing scheme, effective in 2011, for shipments based on package density. Shippers whose packages fell outside the new and reduced dimensional parameters and who couldn't shrink their shipments' cubic dimensions to fit the revised guidelines were hit with what amounted to double-digit rate increases.

To help ease shippers' transition to the new pricing standards, FedEx and UPS extended the current program for two years. However, that moratorium will expire in 2013. While some shippers have been able to adjust their packaging to conform to the policy changes, many simply can't do much about how their goods are packed and will end up eating the higher costs.

In an Oct. 10 presentation to investors and analysts, FedEx said the revenue from the dimensional pricing changes "substantially exceeded our expectations" in the 2011 calendar year. It is believed that FedEx has generated at least $100 million in additional revenue from the change.

Those who closely follow the parcel industry say the flurry of rate increases from both companies reflects the immense power that the near-duopoly enjoys over the business-to-business segment. DHL Express had served as low-price competitor and a key check on FedEx and UPS, but it left the U.S. market in January 2009 after sustaining billions of dollars in losses over six years. Meanwhile the USPS focuses its formidable resources not on business-to-business but on the business-to-consumer delivery segment, and regional parcel carriers lack the technology and geographic reach to give businesses the coverage they need.

UPS and FedEx know this, parcel consultants say, and they are striking while the iron is hot. The 2013 changes are not the first time, nor will they likely be the last.

"I'm predicting a great 2013 for UPS," says Hempstead.